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Mortgage lenders worried about commonhold insolvency

Mortgage lenders are reluctant to lend money to homebuyers in a commonhold set-up over insolvency fears, says the Law Commission, which has been tasked by the government to find ways to make the leasehold alternative work.

Commonhold allows a person to own a freehold flat and be a member of the company which owns and manages the shared areas and structure of the building. However, it has struggled to gain traction since it was introduced in 2002 – there are only 150 commonhold units in England and Wales.

The commission told a stakeholder engagement event last week that mortgage lenders are reluctant to lend to commonhold buyers because they are concerned about the association potentially becoming insolvent. Nick Roberts, one of the commission’s lawyers, said: ‘Our priority must be to prevent commonhold associations becoming insolvent in the first place. The first obvious thing to do is require commonhold associations to take out public liability insurance, which is not a requirement under the 2002 act.’

In 2002, Roberts said, it was suggested that commonhold associations might struggle to get public liability insurance. ‘Bearing in mind risk management companies and other leasehold-controlled companies, we do not think that’s likely. If people are having problems we would like to know about them.’

Commonhold associations should also be required to have ‘reserve’ or ‘sinking’ funds, Roberts said.

The commission has been looking at commonhold as part of a wider residential leasehold and commonhold project, which includes leasehold enfranchisement and the right to manage. Its commonhold consultation closes on 10 March.